Singapores Economy SINGAPORE – A Survey of its Economic Institutions Since its inception, the Republic of Singapore has combined the fastest growth with the lowest inflation of any industrial economy. This feat was accomplished with a strict set of economic goals including a conservative monetary and fiscal policy, free trade, and a commitment to stable prices (Wood, 25). This evaluation of Singapore’s economy will look at the history and forces behind their success. Background Sir Stamford Raffles established Singapore as a British trading post in 1819. At the time the island was scarcely inhabited, had no valuable resources, was mostly marsh and jungle land and wasn’t located on the major commercial trade routes. The only thing the island had going for it was its location for secondary trade and its deep water port.
It wasn’t until the 1860’s, when the Suez Canal opened, that the port’s true potential was realized. With the canal thoroughfare, the island suddenly became attractive as a resting point. Initially, it was used as a coaling station for the steam boats traversing the new routes between the East and West. From here, Singapore was rapidly integrated in the commercial channels as a source for rubber and tin, and as a distributor for goods collected from Europe and America (Woronoff, 121-2). This newfound prosperity came to a halt in World War II when Singapore’s occupation was juggled between Japan, Britain, and Malaysia.
After all the commotion was over, Singapore secured its independence on August 1965 and was declared a republic in December 1965. At this point, the Republic of Singapore had to start anew (Buchanan, 31). In effect, it had to develop it’s own system of government and economic policies to retain its success. After all the smoke cleared Singapore was able to accomplish this feat and much more. Setting Singapore has approximately the area and population of the city of Chicago. The total land area is about 239 square miles including 58 surrounding islets.
It is separated from the mainland of Malaysia by the Johore Strait to the north. Across the Strait of Malacca and the Singapore Strait to the west and south of the island lies Indonesia. It is situated just 85 miles north of the equator so its climate is tropical (Deyo, 104). The population is entirely urban with “a strong manufacturing base, and active service sector, and virtually no agriculture” (Gregory, 261). There are also virtually no natural resources (Woronoff, 122). Throughout its development, Singapore’s population has increased at a blinding rate due to immigration and high birth rates.
It went from a few thousand when Raffles arrived to about a million after the war to about 2.8 million today (Buchanan, 162). Economy Singapore has one of the World’s most open economies, rivaled only by Hong Kong. There are few protective tariffs and the government has provided an attractive climate for foreign investment. It has one of the world’s largest and busiest ports and oil refinery centers. Also, it is a major financial center, trailing only London, New York, and Hong Kong in the number of commercial banks (135) and is the center of the Asian Dollar Market with 190 financial institutions that cater to foreign depositors.
Compared to the size of its economy, Singapore leads the world in foreign trade (Wood, 30). Goals are something Singapore holds dear. Among them are “the diversification and upgrading of industry while developing the island into a center of regional services and international finance.” Skill-intensive and high-tech industries are encouraged (Buchanan, 164). Among the main industries that have made Singapore successful are as follows. Manufacturing is responsible for about 25% of the GDP. From 1965 to 1980, manufacturing grew at an annual rate of 13.3%.
Other major activities are petroleum refining, and machinery and appliances (including the large electronics industry). Interestingly, agriculture is responsible for the employment of only about 1% of the labor force (Wood, 139-40). This is a drastic difference to many of its neighbors and the reason will be introduced shortly. Though Singapore is a capitalist society, their monetary policy hardly takes a laissez faire approach. In their commitment to monetary stability, the government sets economic goals and “unhesitatingly interferes with market forces to achieve those goals” (Wood, 30).
Examples of how the government accomplishes its goals are discussed briefly below. Because land space is so limited, the government steps in to make sure it is used in the most efficient way. Road construction is kept to a minimum by a 225% tax on new automobile purchases, cremation is encouraged, outlying villages are destroyed and its inhabitants transferred to urban high-rise housing, and agriculture has been nearly eliminated. The logic behind reducing agriculture is that it is very land intensive and cheap food is available from the nearby agricultural communities. This effectively leaves room for the less land intensive activities like trade, manufacturing, and services. Between 1965 and 1989 the share of agriculture and fishing in GDP fell from 3.1% to 0.3% (Wood, 31).
Beyond having high automobile taxes, the government offers other incentives to alternative transportation. They have a network of high quality public transportation which consists of buses, taxis, and a mass-rapid-transit (MRT) system. The MRT routes link the major housing estates with the central business district. Also showing Singapore’s commitment to high quality transportation is the national carrier, Singapore Airlines, which has a world-wide reputation of excellence (Deyo, 47). On fiscal policy, the government of Singapore enforces private savings and manages a surplus in its own budget.
Savings exceed 40% of income and most is handled through the Central Provident Fund under which employers and employees contribute 18% and 22% to respectively. Withdrawals from this account are only allowed for home purchase (the main use), retirement income, home repair, and hospital expenses. (Buchanan, 107). Singapore is classified as an upper-middle-income country by the World Bank. Performance-wise, Singapore’s economy has done very well compared to the rest of the world.
In 1989 the unemployment rate was at 2.2%, down from 6% in 1970 (Wood, 32). The GNP per capita in 1985 was $7420, the second highest in Southeast-Asia behind Brunei. Wages, which are controlled, rose 8.7 percent per annum (compared with a growth rate of 4.6%) between 1979 and 1984 (Woronoff, 140). Between 1965 and 1990, the average annual growth rate of Singapore’s per capita real GDP was 7.2% compared to 6.7% for South Korea and 6.4% for Taiwan (Singapore’s closest competitors). Singapore’s average rate of consumer price inflation was 3.6%, compared with 4.2% for West Germany which had the second lowest inflation, and 5.6% for the U.S.
(Wood, 25). Conclusion Singapore’s dedication to a strong economy and stable prices have made it one of the most successful economies in the world in a relatively short amount of time. It’s openness to the outside world lends itself as an example as to what other newly developing economies and governments can accomplish if they are committed to their goals. Granted, Singapore’s governmental and economic institutions have only been around for 30 years so we will have to see how they stand the test of time. There’s no denying, though, that they are off to a great start. Bibliography Buchanan, Iain.
Singapore in Southeast Asia. London: G Bell and Sons, LTD, 1972. Deyo, Frederic C. The Political Economy of the New Asian Industrialism. London: Cornell University Press, 1987. Gregory, Paul R.
Comparative Economic Systems. Boston: Houghton Mifflin Co, 1995. Wood, John H. “Monetary Policy in a Small Open Economy: The Case of Singapore.” Economic Review Second Quarter 1992: 25-36. Woronoff, Jon.
Asia’s “Miracle” Economies. New York: M.E. Sharpe, INC, 1986.